Power Finance: Chugging along nicely:: Macquarie

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Power Finance
Chugging along nicely
Event
 We had a discussion with Power Finance management to get an update on
the company. We maintain our OP on the stock with TP of Rs458.


Impact
 Follow on issue likely in April/May 2011. A note for a divestment+ fresh
equity issuance has been circulated to various ministries. The latter will then
come back with their suggestions which would be included and then a final
note will be put before the cabinet for approval. Once approvals come it would
take about three months for the issue to come before the market. As such it is
likely to come in April or May of 2011.

 Cost of bonds remains under control... Cost of long tenor bonds does not
seem to have jumped significantly. The latest bond issuance has been done
at coupon of 8.8% that is within the range of 8.7–8.9% done by the company
in the recent past. Management is seeing cost of funds spiking more in the
short term paper market. The proportion of borrowings with duration less than
1 year is negligible for PFC.

 ..even as pricing power remains. The company has increased its lending
rates by 25bp in September, the beneficial impact of which will likely flow
through margins in 3Q11. Management does not see major competition in its
focus market- that of state power utilities which has enabled it to go through
with the lending rate increase.

 Confident about asset quality. Management does not see any worrying
signs on repayment of loans. It believes the escrow mechanism is working
well (borrower’s sales receipts go to an escrow account with PFC having first
right on them). Regarding AT&C losses, it believes that the progress under
APDRP is likely to accelerate the loss reduction which has already come
down from ~33% a few years back to ~28% currently. Material loss reduction
under the scheme would however be visible only 2–3 years later.

 On an issue of bank license, management clarified that no decision has been
made yet on the appointment of a strategic consultant. This consultant was
supposed to suggest various strategic options to the management.

Earnings and target price revision
 No change.

Price catalyst
 12-month price target: Rs458.00 based on a Gordon Growth methodology.
 Catalyst: pick up in loan growth in 2H11; more clarity on FPO

Action and recommendation
 We retain our OP on PFC with its strong earnings visibility, excellent return
ratios and attractive valuations. We advice investors to accumulate the stock
ahead of the FPO